1.1 GENERAL DESCRIPTION OF THE STUDY
The financial performance of firm is a subject that has attracted a lot of attention, comments and interests from both financial experts researchers, the general public and the management of corporate entities. Liquidity refers to the ability of an organization to meet cash as well as other obligations without incurring considerable losses. Liquidity management is therefore the appropriate administration of an entity’s cash and other assets to be able to meet its current liabilities. For this reason, it is essential for all organization including manufacturing firms to have some form of liquidity management strategy in place. Liquidity management will include the analysis of financial ratios often used in accounting. By analyzing the accounting ratios, business owners will get valuable insights into financial aspects including cash available to spend or invest, amounts due from customers and money tied up in movable and immovable assets. These figures might sound obvious to locate but can sometimes be hidden in between financial jargon.
The impact of liquidity management in manufacturing firms is very important and necessary if a firm must carry out its business operation successfully. Effective liquidity management leads to efficiency, profitability and solvency, with this, liquidity management means effective allocation of fund and capital in other to achieve a targeted objectives. Therefore, liquidity and profitability are the main goals of manufacturing firms. Liquidity management requires maintaining liquidity in day to day operations to ensure its smooth running and meet its obligations when they fall due (Eljelly, 2004). Efficient management of liquidity plays a key role in the successful operation of a company. A company should ensure that it possess sufficient liquidity to meet its short term obligations. Studying liquidity is important to both the internal and the external analysts because of its close relationship with day to day operations of a firm (Bhunia, 2010).
Liquidity is stressed such more strongly in relent time than profitability. This growing emphasis on the impact of liquidity management results from the role which liquidity plays in life and growth of business organizations. It is very important that a firm must go by the liquidity decision which stated that current assets of the firm should be managed efficiently to prevent the firm from becoming insolvent. Investment in current asset affect the risk, liquidity and profitability. If a firm does not invest sufficient fund in current assets, it may likely become illiquid, it may lose profitability if it has excess fund in current asset because idle current asset would be achieved between profitability and liquidity. In other to ensure that neither insufficient nor unnecessary funds are invested in current assets, the financial manager should circulate a sound current assets management technique.
According to Padachi (2006) a firm is required to maintain a balance between liquidity and profitability while conducting its daily activities. Profitability is directly affected by both inadequate and surplus liquidity (Ogundipe, Idowu and Ogundipe, 2012). For instance when the “necessary” level of liquid assets is exceeded, their surpluses when the market risks remain stable, become a source of ineffective utilization of resources which has an adverse effect on profitability.
1.2 HISTORY OF CASE STUDY ORGANIZATION
Rokana Industry Nigeria Plc., is engaged in manufacturing and marketing of toothbrush, spring water air fresheners etc. The company was incorporated in Nigeria as a private limited liability company on 11th September, 1978 under the name Rokana Industry Nigeria Limited Company (Plc) in 1992 and presently it is known as Rokana Industry Plc. Its head office is located at No.4 Ajayi Street, off 52 Allen Avenue (Next door to Lagos Hiltons Hotel) Ikeja, Lagos, while its factory is located at Plots Mission Road, Umualum Nkede Owerri, Imo State. It also maintain ownership depot in Kano and Aba and also operates four factories located at Nekede, Owerri and Obowo all in Imo State and one in Lagos. The business started with the production of tooth brush in the Nekede factory which was commissioned in the 1980s. An additional plant was installed in 1990, presently the company has about seven product that it produces. These includes: Jordan tooth brush, Rokana dry hair African Queen, No.1 insecticide, sparkle furniture polish, Natusan dry skin lotion, Rokana dental stick and plague remover and Uzzi sping water.
The company has a staff strength of about 2,500 employees spread over its four factories in various branches throughout the country.
1.3 STATEMENT OF THE PROBLEM
Over the years, the manufacturing sector has been a victim of high production costs which invariably reduces profitability. As argued by Aknbuli (2006) poor management is the main reason for business failure as many corporate organization went into liquidation because of poor management. Pearler (2009) observed that most failed businesses were due to cash flow problems. The importance of cash flow is particularly pertinent when access to cash is difficult and expensive. According to Bosno and Dardac (2014), the required liquidity for each company depends on the statement of financial position situation of the company. To assess the liquidity state, special importance is held by the way in which there are classified organizational liabilities and assets (Bosno and Dardac, 2004).
Studies were made in order to observe the interaction between these two variables such as Lazaridis and Tryfonidis (2005) who found a relationship between liquidity management efficiency and profitability. Companies enjoy better pricing when they hold enough cash to purchase from suppliers and thus they may enhance their profit. So having enough liquidity also affects the profitability of thee firm.
The problem to be addressed by this study is to evaluate liquidity measures and the relationship between liquidity and profitability on the efficiency of manufacturing firms.
1.4 OBJECTIVES OF THE STUDY
The objectives of the study are thus:
- To find out the impact of liquidity management on the efficiency of manufacturing firms.
- To identify the relationship between liquidity and profitability.
1.5 RESEARCH QUESTIONS
The study was guided by the following research questions thus:
- What are the impact of liquidity management on the efficiency of manufacturing firms?
- What are the relationship between liquidity and profitability?
1.6 SCOPE OF THE STUDY
The area covered by this study is Rokana Industry Nigeria Plc. And data used collected therein, thee researcher specifically will concentrate on how liquidity management increases the efficiency of its assets and liabilities.
The research covers the management crew and the accountants of Rokana Industry Nigeria Plc., other departments and organizations are not included since enough data will be gathered from the management and accountants of the organization.
It is assumed that the result obtained from the case study will be the same in other manufacturing firms.
It is also assumed that liquidity management will enhance, improve or increase the efficiency of not only Rokana Industry Nigeria Plc,. but also other manufacturing firms.
1.8 SIGNIFICANCE OF THE STUDY
The findings of the study will benefit the following constituents:
PONTENTIAL RESEARCHERS: The study will serve as a frame work of reference to potential researchers who might want to conduct a research on the same or similar topic.
MANUFACTURING FIRMS: The study will be of immense important to all manufacturing firms because it will help them understand the concept of liquidity management on the successful operation of every entity or organization.
STUDENTS: The study will serve as a help tool to students of Accountancy, Banking and Finance or other related discipline at the cause of their studies.
GENERAL PUBLIC: The study will also be significant to the general public who wish to engage on the activities of production or manufacturing of goods so as to enable them know the importance of the impact of liquidity management on the efficiency of manufacturing firms.
1.9 DEFINITIONS OF UNFAMILIAR TERMS
LIQUIDITY: This is the ability to meet expected and unexpected demands for cash through ongoing cash flow or the sale of an asset at fair market value (Barad, 2010).
LIQUIDITY MANAGEMENT: Liquidity management has been defined as to involve managing the money of the firm in order to attain maximum interest of the firm in order to attain maximum interest income on idle funds (Johnson and Aggarwal, 2008).
PROFITABILITY: This is the capacity to make benefit from all the business operations of an organization, company, firm or an enterprise. It shows how efficiently the management can make profit by using all the resources available in the market (Sandhar, 2013).
MANUFACUTRING FIRM: This refers to any business that transforms raw materials into finished or semi-finished goods using machines, tools and labour. Manufacturing sectors include production of food, chemicals, textiles, machines and equipment (Laura, 2009).
EFFICIENCY: This is a measure of the ability of an organization to produce and distribute its products in accounting terms. It is quantified by a comparison of the standard hour allowed for a given level of production.
SOLVENCY: This is the degree to which the current assets of an individual or entity exceed thee current liabilities of that individual or entity.
ASSETS: According to Ukpai on International Financial Reporting Standard (IFRS), assets are resources controlled by thee entity as a result of past event and from which future economic benefits are expected to flow to the entity.
CURRENT ASSETS: A current asset is cash and any other company asset that will b turning to cash within one year from the date shown in the heading of the company’s statement of financial position.
IMPACT: This is the measure of the tangible and intangible effects (consequences) of one thing or entity’s action or influence upon another.